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Monday, July 15, 2013

Why Progressives Should Love a Carbon Tax—Although Not All of Them Do

Progressives should love a carbon tax. Most progressives love the
environment and believe that carbon emissions cause environmental harm.
Unlike conservatives, whose attitudes toward carbon taxes were the
subject of my last post,
progressives have no generalized aversion to taxes. Carbon taxes should
be a natural for progressives, then, if they can accept the power of
economic incentives to slow the destruction of the planet.

To be sure, many progressives do express strong support for carbon taxes. Here are just three of many examples:

In Green Illusions: The Limits of Alternative Energy
Ozzie Zehner argues against the wishful thinking that solar, wind, or
other technological fixes will bring a future of cheap, clean, and
abundant energy. Insisting that a strong push for energy conservation
has to be part of the mix, he advocates carbon taxes to counteract what
he calls “the boomerang effect”—the tendency for subsidies for clean
energy to make energy in general cheaper, therefore discouraging
conservation.

Yet, not all progressives are convinced. Many
are skeptical on principle of our capitalist economic system and
instinctively distrust market-based environmental policy. Others fear
that a carbon tax would disproportionately harm the poor. Still others
have ethical objections to the whole idea of bribing people to do things
they ought to choose voluntarily, out of love and respect for the
planet. Let’s look at each of these objections in turn.

Doubt that people really respond to market incentives

One
reason that some progressives are skeptical of a carbon tax is a simple
doubt that people really respond to prices. If you want to get people
to stop doing something, they think, you need a government regulation
that commands them not to do it in no uncertain terms.

For example, here is how Earthjustice President Trip Van Noppen puts it in an interview published on the organization’s website:

The
problem with a carbon tax, as a nice and tidy solution for climate
change, is that some things we tax we still use. We've got really,
really high cigarette taxes, and people still smoke. It doesn't
necessarily guarantee the reductions that you'd need to have to prevent
climate change. So in other words, we wouldn't know whether the tax
would be at a sufficient level to change behavior at the pace we'd need
to change behavior . . . we don't really know how much the market would
respond.

The economic term for the responsiveness of demand to a change in price is elasticity.
A large negative value for elasticity of demand means that people make a
large reduction in the quantity they buy when the price rises. For
example, an elasticity of -0.8 would mean that a 10 percent rise in the
price of a product would lead to an 8 percent decrease in the quantity
purchased. So what is the price elasticity of demand for carbon-based
energy?

The fuel for which economists have most extensively studied elasticity is gasoline. One widely cited source is a 1996 meta-analysis by Molly Espey.
She concluded that the best estimate for the price elasticity of
gasoline demand was -0.26 in the short run and -0.58 in the long run. A 2011 study
by Todd Litman of the Victoria Transport Policy Institute provides a
comprehensive review of the literature since Espey’s paper. Litman finds
long-run fuel price elasticities in the range of -0.4 to -0.8. Those
numbers suggest that a tax that added $1 per gallon to the cost of
gasoline—still leaving it well below European levels—would cut use by 10
to 20 percent. (For a more detailed discussion of the evidence on
elasticity, see this earlier post.)
If
elasticity numbers are too abstract, here is a chart from the Litman
study, which shows a convincingly tight relationship between fuel prices
and fuel use across OECD countries. Can it really be just coincidence
that the United States, with the lowest fuel prices, also has the
highest fuel consumption?

Prices
are having an effect on fuel choice in other industries, as well. One
of the strongest trends is increased replacement of coal by natural gas
in the generation of electricity. Duke Energy is one of several big
utilities that are rapidly moving from coal to natural gas, in large
part because of lower gas prices. According to a report in Forbes,
Duke Energy’s chief executive, Jim Rogers, is calling for the
government to put a price on carbon with either a tax or a cap-and-trade
system. According to Rogers, who should know, doing so would accelerate
a trend away from coal, not only toward gas but also toward solar and
wind power.

In short, the preponderance of evidence is that prices
work, both to promote energy conservation in general and to motivate
the choice of cleaner over dirtier sources of energy.

A carbon tax would hurt the poor

Critics
of a carbon tax frequently object that any policy that raises the cost
of energy would disproportionately hurt the poor. They base the claim on
data that indicate that lower income families spend a higher percentage
of their budget on transportation, home heating, and electric utilities
than do the more affluent. However, even if we accept the truth of that
claim, it does not constitute a valid objection to a carbon tax.

The
main reason is that policies to keep energy prices low are a poorly
targeted way to help the poor. Just do the math. Start with data
indicating that families in the bottom half of the income distribution
spend an average of about 20 percent of their budgets on energy,
compared with less than 10 percent for those in the top half. Combine
that with the fact that households in the lower half of the income
distribution receive only about 20 percent of all income. Comparing 10
percent of 80 percent to 20 percent of 20 percent makes it clear that
lower-income families, despite their greater relative
expenditures, consume only about a third of all energy. The much smaller
number of households that fall below the federal poverty line probably
consume only about 15 percent of all energy. That would mean that for
every dollar by which national consumer energy costs decrease, the poor
gain only 15 cents.

There are many proposals for combining a
carbon tax with targeted mechanisms for offsetting its impact on the
poor. One way to do so would be to refund part of the tax directly to
low-income households, either through a special rebate or by expanding
some existing program like the Low Income Home Energy Assistance
Program. As long as the rebate came in a lump sum, rather than in
proportion to energy use, it would offset the distributional effect of
the tax without reducing its incentive to conserve.

Another
approach—one that is consistent with revenue neutrality—would be to use
some of the money from a carbon tax to lower the marginal rate of the
payroll tax. Because the payroll tax is inherently regressive, reducing
it would disproportionately help lower-income households. With either of
these approaches, just a fraction of the revenue from a carbon tax
would be enough to compensate low-income households. The rest would be
available for other purposes—reducing the deficit, lowering the rates on
other tax rates, or expanding other federal programs.

There is
also another way to think about the effect of a carbon tax on the poor.
Keep in mind that the reason for such a tax in the first place is the
belief that carbon dioxide emissions are harmful to the environment. If
so, it is just as true for the CO2 emitted by the poor as by the rich.

We
do not, as a rule, exempt poor people from restrictions on socially
harmful behavior. We do not suspend rules against littering in public
parks on the basis of income. We do not allow poor people to shoplift
their food from supermarkets; we give them food stamps, instead. By the
same token, it is reasonable to require poor people to behave
responsibly toward the environment. If we are concerned that a carbon
tax pinches the budgets of poor households, we should provide relief
through other channels, not give them a pass on the need to conserve
energy and reduce pollution.

We should protect the planet because we love it

A
third objection voiced by some progressives is that we should protect
the planet because we love it, not for purely economic motives. Ethical
objections to economic incentives are not limited to carbon taxes; they
apply to all efforts to put a price on pollution, whether through taxes,
marketable pollution permits, carbon offsets, or other mechanisms.

Harvard philosopher Michael Sandel, author of What Money Can’t Buy: The Moral Limits of Markets, has
expressed this view with particular force. All policies that rely on
economic incentives, he says, pose the danger that those who pay a
pollution tax, buy a carbon offset, or trade pollution permits are
likely to consider themselves absolved of any further responsibility for
climate change. Such incentives become “a painless mechanism to buy our
way out of the more fundamental changes in habits, attitudes, and ways
of life that may be required to address the climate problem.”

He
applies his moral reasoning not just to individuals, but also to
nations. Suppose that some wealthy county imposes a carbon tax or
cap-and-trade mechanism. “Letting rich countries buy their way out of
meaningful changes in their own wasteful behavior,” he says, “reinforces
a bad attitude—that nature is a dumping ground for those who can afford
it.” Whatever the efficiency of market-based mechanisms for combatting
pollution, they “make it harder to cultivate the habits of
self-restraint and shared sacrifice that a responsible environmental
ethic requires.”

The best response to this ethical argument, in my view, is one made by Gernot Wagner in his book But Will the Planet Notice, cited at the beginning of this post. Here is what he writes in response to Sandel:

By
all means, make the moral case. Teach it in philosophy classes and
preach it from the pulpits, but let’s not wait for it to have an impact
while the planet burns.
By all means, declutter your life. . .
Downsize your apartment. Carry around a canvas bag. Bike. . . But
everyone else won’t catch up to your good deeds voluntarily—not in time,
and not with sufficiently strong action.

That’s where economics
enters the room There’s simply no way to go about tackling this problem
other than taking seriously the incentives all of us face. Getting
several billion of us to behave differently—to behave morally—means
guiding market forces in the right direction, making it in our interest
to do the right thing. It’s the only way to make the planet notice.

The bottom line

The
good news is that, despite initial skepticism, progressives are
increasingly supportive of carbon taxes and other market-based
environmental policies. Ironically, it is now conservatives who are more
likely to reject them.

That is not to say that progressives have
come around all the way. One sign of the sometimes half-hearted
acceptance of market-based policies is an insistence on a
belt-and-suspenders approach: Carbon taxes, marketable permits, or
carbon offsets are acceptable as a supplement to existing
command-and-control regulations, but not as a replacement for them. For
example, a position statement from the Sierra Club reads as follows:

The
Sierra Club advocates the establishment of pollution taxes which would
make it less expensive for a polluter to adopt alternative processes or
invest in additional equipment to curtail releases to the environment
than it would be for him to continue as before. Such taxes would
supplement, and not replace, standards on maximum permissible emissions.

That
attitude poses a significant barrier to the kind of coalition-building
that will be necessary if progressive and conservative advocates of
carbon taxes are ever to agree on mutually acceptable legislation.
Conservative advocates of market-based environmental policy like it, in
large part, because it would replace the mish-mash of grossly
inefficient taxes and regulations that they see as shackles to business.
To many of them, adding a carbon tax on top of CAFE standards, clean
energy mandates, ethanol subsidies, and the rest would make matters
worse—not only worse for the business environment, but worse for the
physical environment.

In a rational world, there would be room for
a win-win compromise. Conservatives could make concessions to
progressives on the need to protect the poor, for example, by using part
of the revenue from carbon taxes to lower payroll taxes. Progressives,
in turn, could offer conservatives some relief from the red tape of
overlapping mandates, subsidies, and performance standards. In exchange
they would get market-based policies that have lower compliance costs,
but are equally or more effective in cutting pollution. Whether such a
rational compromise is possible in today’s politically polarized America
is, of course, another question.

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